Question

Problem 19-32 (Algorithmic) (LO. 1, 4)

At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $365,000. Blue's current E & P is $219,000, and at the end of the year, it distributes $730,000 ($365,000 each) to its equal shareholders, Pam and Jon. Pam's stock basis is $51,100; Jon's stock basis is $204,400. How is the distribution treated for tax purposes?

If an amount is zero, enter "0".

Each shareholder has dividend income of $________. In addition, Pam has a reduction in stock basis to $and a capital gain of $_______. Jon has a reduction in stock basis to $________.

Answer 1

Blue corporation
	accumulated earnings E & P	$365,000
	current E & P	$219,000
	Total E & P	$584,000	upto which distribution is treated as divdend distribution
	Distribution	$730,000
	Pam	Jon	Total
Distribution	$365,000	$365,000	$730,000
Dividend	292000	292000	$584,000
Excess over Dividend	$73,000	$73,000	$146,000
Less: Stock Basis	51100	204400
capital gain/new stock basis	$21,900	$   131,400
	Capital Gain	Stock Basis

Each shareholder has dividend income of $292,000. In addition, Pam has a reduction in stock basis to 0$ and a capital gain of 21,900. Jon has a reduction in stock basis to $131,400.